Before Pandemic, Spending Exceeded Long-Term Revenue in 8 States

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Before Pandemic, Spending Exceeded Long-Term Revenue in 8 States
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States are expected to balance their budgets every year. But that’s only part of the picture of how well revenue matches spending across all state activities. States’ own financial reports offer a broader look and reveal that eight states failed to amass enough total revenue to cover their expenses between fiscal years 2005 and 2019, the final year before the pandemic and recession.

A look beyond states’ budgets at a fuller accounting of their financial activities shows that New Jersey had accumulated the largest gap between its revenue and annual bills. Between fiscal 2005 and 2019, it took in enough to cover just 91.5% of its expenses—the smallest percentage of any state. Meanwhile, Alaska collected 135%, yielding the largest surplus.

The typical state’s revenue, composed predominantly of tax dollars and federal funds, totaled 102.7% of its annual bills over the past 15 years. Zooming out from a narrow focus on annual or biennial budgets—which may mask deficits as they allow for shifting the timing of when states receive cash or pay off bills to reach a balance—offers a big-picture look at whether state governments have lived within their means, or whether higher revenue or lower expenses may be necessary to bring a state into fiscal balance.

States can withstand periodic deficits without endangering their financial health, but long-running imbalances can create an unsustainable fiscal situation, pushing off to future taxpayers some past costs for operating government and providing services. Although most states collected more than enough aggregate revenue to cover aggregate expenses, the eight states that had a deficit—or a negative fiscal balance—carried forward deferred costs of past services, including debt and unfunded public employee retirement liabilities.

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This fuller picture of states’ financial activities—capturing all but those for legally separate auxiliary organizations, such as economic development authorities or some universities—is drawn from their audited comprehensive annual financial reports. These reports attribute revenue to the year it is earned, regardless of when it is received, and expenses to the year incurred, even if some bills are deferred or left partially unpaid. This system of “accrual accounting” offers a different perspective of state finances than budgets, which generally track cash as it is received and paid out. Accrual accounting captures deficits that can be papered over in the state budget process, even when balance requirements are met, such as by accelerating certain tax collections or postponing payments to balance the books. This analysis begins with fiscal 2005 because 15 years of expense and revenue data offer a long-term view that is still relevant to present-day decision-making.

Accounting for funds as the financial reports do is like a family reconciling whether it earned enough income over 12 months not just to cover costs paid with cash but also to pay off credit card bills and stay current on car or home loan repayments, rather than pushing some charges off to the future.

A state whose annual income falls short generally turns to a mix of reserves, debt, and deferred payments on its obligations to get by. Conversely, when a state’s annual income surpasses expenses, the surplus can be directed toward nonrecurring purposes, including paying down obligations or bolstering reserves—or new or expanded services that create recurring bills.

Like families, states can withstand periodic deficits without endangering their fiscal health over the long run. In fact, all but one state (Montana) had one or more years in the red. But chronic shortfalls—as with New Jersey and Illinois each year since at least fiscal 2002—are one indication of a more serious structural deficit in which revenue will continue to fall short of spending absent policy changes. Without offsetting surpluses, long-running imbalances can create an unsustainable fiscal situation.

State highlights

States’ performance is analyzed from two perspectives: First, the 15-year lump sum of revenue relative to expenses, to uncover states’ ability to bring in sufficient funds to cover costs over the long term; and second, the year-by-year record for each state, to identify how often it experienced shortfalls.

Comparing states’ revenue—comprising much more than tax dollars—and expenses, in aggregate and year-by-year totals from fiscal 2005 to 2019, shows:

  • New Jersey had the largest deficit, with aggregate revenue able to cover only 91.5% of aggregate expenses, followed by Illinois (94.1%). They were the only two states with aggregate shortfalls exceeding 5% of total expenses, and the only ones with annual deficits in each of the 15 years.
  • Additional states with symptoms of structural deficits were, Massachusetts (96.2%), Hawaii (97.2%), Kentucky (98.4%), Maryland (99.1%),New York (99.5%), and Delaware (99.8%). All but Delaware experienced deficits in at least 10 of the 15 years.
  • Alaska accumulated the largest 15-year surplus (135%). Although Alaska’s balance is high, revenue has been lower and the state has pulled back on spending compared with earlier in the decade.
  • Other states with the largest accumulated surpluses since fiscal 2005 were North Dakota (123.4%), Wyoming (124.9%), Utah (111.1%), and Montana (109.5%). Resource-rich states tend to acquire large surpluses in boom years that can help cushion shortfalls when oil or mining revenue decline.
  • Aside from Montana, which was the only state to end each year with a surplus, 11 recorded just one deficit over the 15 years examined: Idaho, Iowa, North Carolina, North Dakota, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, and West Virginia.

Changes in the economy can move a state’s annual revenue and expenses out of balance, as can policy decisions such as tax or spending changes.

Looking at states’ balances year by year, shortfalls mainly occurred during and immediately after the Great Recession, suggesting that most states’ challenges were temporary. (See the “State trends” tab.) For example, all but Louisiana, Montana, North Dakota, and West Virginia ran deficits in fiscal 2009, the nadir of the 18-month downturn.

As the nation’s economic recovery took hold, a majority of states balanced their books and have kept them in the black since fiscal 2011. Still, 15 states in fiscal 2016 and 2017 failed to amass enough revenue to cover their annual expenses, as many slogged through the weakest two years of tax revenue growth—outside of a recession—in at least 30 years.

Only five states recorded annual shortfalls in fiscal 2019—the last full year before the COVID-19 recession in March and April of 2020—the fewest in 14 years, following seven states with deficits in fiscal 2018. In both years, nearly every state experienced tax revenue gains that drove widespread budget surpluses, in some states for the first time since the 18-month recession, which ended in June 2009. However, it is unclear whether more states’ books achieved balance recently strictly because of stronger fiscal performance; accounting rules effective in 2018 changed how states estimated their unfunded retiree health care costs, lowering expenses for some, at least on paper. So fiscal 2018 and 2019 results are not directly comparable with those for other years.

Looking ahead, states faced substantial volatility in their balance sheets in fiscal 2020 that threatened to throw more states’ finances out of balance. The outbreak of the coronavirus and ensuing two-month recession triggered a plunge in tax revenue collections, a spike in spending demands, and an influx of federal aid to combat the economic effects of the pandemic in the second half of the fiscal year.

Why data from states’ own financial reports matters

Comprehensive Annual Financial Reports broaden the scope of financial reporting beyond state budgets to capture all funds under control of the state government, including revenue and spending from related units, such as utilities and state lotteries. This produces a more comparable set of state-to-state data. All primary government operations were included in this analysis. “Component units,” such as economic development authorities or public universities, were excluded when states classified them separately.

Although all states file audited and nationally standardized financial reports, they are mostly used by credit rating agencies and other public finance analysts, while most state finance discussions center on budgets.

Examining aggregate revenue as a share of aggregate expenses—that is, all revenue and all expenses from fiscal 2005 to 2019, each adjusted for inflation—provides a long-term perspective that transcends temporary ups and downs. This approach allows surplus funds collected in flush years to balance out shortfalls in others.

Importantly, just because a state raised enough revenue over time to cover total expenses does not necessarily mean that it paid each bill. For example, a state might have brought in surpluses nearly every year while falling behind on annual contributions to its pension system and electing to use the money for other purposes. So this measure gauges states’ wherewithal but does not reconcile whether revenue was used to cover specific expenses. Collecting more revenue than expenses over the long term is a necessary but insufficient condition of fiscal balance. Further insights can be gleaned from examining states’ debt and long-term obligations.

A negative fiscal balance can be one indication of a structural deficit in a state, but there is no consensus on how to measure a circumstance in which revenue will continue to fall short of spending absent policy changes. Some states, for example, diagnose the existence of a structural deficit by comparing cash-based recurring general fund revenue to recurring expenditures under normal economic conditions. However, such data are not available on a 50-state basis.

Download the data to see individual states’ inflation-adjusted revenue and expenses for each fiscal year from 2005 to 2019. Visit Pew’s interactive resource Fiscal 50: State Trends and Analysis to sort and analyze data for other indicators of states’ fiscal health.